by Raul de Frutos on FEBRUARY 7, 2017

Our Raw Steels MMI rose 8% in January. Flat products achieved or came close to multiyear highs across the sub-index. In this post we will lay out some of the factors driving this price rally. A rally that we predicted three months ago.

Rising International Steel Spreads

In late January, President Donald Trump took executive action to advance construction of the Keystone XL and Dakota Access oil pipelines. This will significantly increase U.S. steel demand from the energy sector.

The new president also issued another executive order that required them, and all pipeline projects, to use only American-made steel. There is no language in Trump’s memo that indicates any waivers for American-made steel would exist for trade-agreement countries. If this policy is adopted, for at least the next four years even by only the executive branch, it is, by far, the most stringent definition of “American-made” we have seen in federal steel procurement.

With the expected increase in U.S. demand for steel and new “Buy American Steel” policies, the spread between U.S. and international prices could widen this year. Spreads bottomed at the end of November and it looks like there have room to rise again.

Strong Chinese Steel Prices

China shut at least 45 million metric tons of steel production capacity last year, meeting its target, in a drive to address a glut through 2020. In January, China unleashed its boldest reform plan so far for its bloated steel sector, saying it will eliminate all production of low-quality steel products by the end of June.

Coal burning is the biggest contributor to air pollution in China. One of the principal users of coal, and therefore most polluting, is its steel industry. This is another reason to believe Beijing will strengthen its supply-side reforms this year.

Meanwhile, demand indicators from China, by far the largest consumer of steel, continue to look strong. This combination of lower-than-expected supply and stronger-than-expected demand has translated into rising steel prices in China, which continue to look strong. In addition, iron ore prices have held above $80 per mt. Chinese steel mills rely heavily on seaborne iron ore.

Falling China Steel Exports

Chinese steel exports have fallen in double digits for four consecutive months. The E.U. has slapped anti-dumping duties on some Chinese steel products. India has set a minimum import price for steel products to fend off cheap Chinese steel from its borders. The U.S., no slouch when it comes to anti-dumping and countervailing duties on Chinese steel already, now favors a more aggressive trade policy, regularly citing job losses as a result of imports from foreign countries, especially China.

As more countries act against the menace of Chinese steel products, we could see further moderation in Chinese steel exports in 2017, and this would bode well for global steel markets.